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WHY TO INVEST IN PRE- LEASED PROPERTIES
There is no doubt that real estate holds the greatest attraction for UHNIs. Most investments happen in properties, say a pocket of land, commercial properties like readily available offices or industrial warehouses. UHNIs, say with a net worth ranging from Rs 25 crore to Rs 100 crore and even above, have been mandating wealth management firms or real estate advisors to pick grade 'A' pre-leased commercial properties.
These pre-leased commercial properties provide fixed income. Here, the aim is to lease out to quality tenants, earn lease income over a 3-5 year period and subsequently exit with a moderate to high capital appreciation.
There are mainly two kinds of commercial properties. The first is the lease-hold, mainly offered by government institutions like MIDC; they are leased to the buyer generally for a period of 99 years, extendable further. You actually buy rights to use the property and not the property per se. In a way, you are buying a property without really owning it. You have limited rights on what to do with the property.
The second is free-hold property - you become the exclusive owner of the property as well as the land on which it is constructed. It gives more right and responsibility to the owner. In India, a majority of the pre-leased commercial transactions happen on free-hold basis.
No doubt, the entry price is one of the biggest factors in determining the yield. Lower the price, higher the yield. Another key factor is the quality of tenants. If the tenant is a bank or an insurance firm, mainly PSUs, the property commands a rental yield of 6% to 8%. These tenants stay for a longer period and the property is less prone to hopping; hence, it commands a lower yield.
Commercial properties occupied by multinational companies ( MNCs) like foreign banks, investment banks, etc, or domestic firms like BPOs, IT/ITeS units as tenants generate high rental yields, say in the range of 8% to 12%. So, the question arises how a buyer can ascertain if the tenant will stay for a longer period. If the tenant is incurring a substantial expenditure, say to the tune of Rs 2,000 to Rs 4,000 per sq ft on interiors, it can be fairly assumed that they are going to stay for a longer period.
Essentials to be seen while investing in preleased properties
Type & age of the building are crucial while taking an investment decision. Newer the building with grade “A” office spaces will fetch better returns. One should also check the load bearing capacity of the floors, column to column distance (higher is better), floor to ceiling height (preferably 12’+ in case of offices). Energy efficient LEED certified/ Green buildings would be in demand in coming future. The building should also have adequate power back and good quality lifts adequate in number.
Tenant profile is one of the major aspects to be seen while investing in preleased properties. Tenant should have sustainable income source/ growing business/ future growth prospectus
A longer lease term is better depending up on market situation. If drastic upward revival in rentals is seen in near future then shorter leases are also preferable.
Lock-in period is the minimum term that tenant should serve or pay for. Higher lock-in gives better security to the investment.
5.Time Entry Exit Deposit, Rent and rent escalation:
Deposit should cover an average of at least 3 months electricity bills and maintenance charges. In case of longer lock-in, deposit should be higher to ensure the tenant would fulfill his obligations. Annual rental escalation is preferred over escalation after 3 to 4 years.
6.Property Tax and Maintenance charges:
One should check the maintenance charges, property tax and other tax obligations, any pending matters/ penalties before investing.
7.Good Facilities Management:
Good facilities management agency for the premises and the building plays pivotal role in upkeep of the premises and can fetch better capital value for the property in longer run.
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